50 state attorneys general announce foreclosure probe

Oct. 12 (Bloomberg) -- Attorneys general in about 40 states may announce this week a coordinated investigation into potentially faulty foreclosures at the largest banks and mortgage firms. Bloomberg's Monica Bertran reports. (Source: Bloomberg)

The attorneys general of all 50 U.S. states announced Wednesday that they are joining to probe mortgage loan servicers who are accused of submitting false affidavits, but they stopped short of calling for a national moratorium.

The multistate investigation will initially focus on whether Bank of America, J.P. Morgan Chase, Ally Financial and other large mortgage companies made misleading or fraudulent statements to evict struggling borrowers from their homes.

Indiana Attorney General Greg Zoellersaid investigators initially will focus on whether industry employees - so-called "robo-signers" - signed off on thousands of foreclosures every month without reviewing the files as legally required. Homeowner attorneys also allege that lenders forged signatures and improperly notarized documents.

Such actions might have violated laws against unfair and deceptive trade practices, which could result in civil penalties. Typically the laws have been used to protect consumers from false advertising, but state officials say they could also be applied to foreclosure.

Law enforcement officials said they also could use their findings to press lenders to modify more loans for struggling homeowners or change how the industry processes foreclosures.

The companies could face more serious consequences if the attorneys general find criminal acts or that high-level industry executives knew what the robo-signers were doing. About two dozen states have joined the effort, though more are expected to sign up, officials said.

The investigation comes as more lenders are stepping up their reviews of foreclosures.

On Tuesday, Ally Financial said it would expand its own probe to all 50 states. Ally had initially halted evictions in only the 23 states that require a court order for a foreclosure. Ally's move follows Bank of America's announcement last week that it would freeze foreclosure sales.

White House press secretary Robert Gibbs said Tuesday that the administration supports a multistate investigation. But he reiterated that the administration is wary that a freeze could cause "broader harm done to the housing market and to the housing recovery."

That view is in contrast to other Democrats who have called for a national moratorium on foreclosures.

Mortgage servicers have sought to play down the problems as minor technicalities, contending that nearly all of the files show borrowers missed their payments and deserve to lose their homes.

The states plan to share information and coordinate their investigations into improper foreclosures.

Ohio Attorney General Richard Cordray is taking a harder line. Last week, he became the first attorney general to sue a mortgage lender, in this case Ally, for improper foreclosures.

"The most important thing that the lenders need to recognize is the seriousness of the situation. They can't pretend this is a fourth-grade student not quite filling in the oval on a test. This is fraud," Cordray said in a phone interview. Ohio has asked the company to pay $25,000 per violation.

The initial announcement by the attorneys general said 49 states had joined the probe; Alabama was the exception. After receiving media inquiries, Alabama said it, too, would join the investigation. "To be clear, no violations of Alabama law have been alleged at this time. That said, we are troubled to see that mortgage lenders around the country were violating the procedures of our sister states," the attorney general's office said in a statement.